Local bank lending to MSMEs remains sluggish

MANILA, Philippines — Micro, small and medium enterprises (MSME) continued to get a small fraction of loans from banks in the second quarter, as both lenders and borrowers retreated amid the economic fallout from a prolonged conflict in the Middle East.

Loans to MSMEs accounted for 4.48 percent of the local banking industry’s total lending portfolio as of end-June, slightly smaller than the 4.53 percent share in the prior quarter, data from the Bangko Sentral ng Pilipinas (BSP) showed. This was also way below the prescribed ratio of 10 percent.

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In peso terms, P572.74 billion of the banking sector’s P12.8-trillion loan portfolio went to MSMEs. This was a tad smaller than the P573.82 billion in credit that the sector received in the preceding quarter.

Under the Magna Carta for MSMEs, banks must allocate 8 percent of their portfolio to micro and small businesses. Also, 2 percent must be extended to medium-sized enterprises.

The lending quota was in effect for a decade starting in June 2008. But many banks were not compliant, opting to just pay the penalties instead of assuming the risks.

Despite the expiration of the mandated credit allocation in 2018, the BSP continues to monitor bank lending to MSMEs.

The sector makes up about 99 percent of total business establishments in the Philippines and provides around 63 percent of employment.

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Based on the industry’s total loan book, banks would have needed to extend at least P1 trillion to micro and small enterprises in the second quarter to meet the former 8-percent benchmark. Hitting the 2-percent threshold for medium-sized firms would have required P256 billion in lending.

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“Banks remain prudent in extending credit amid a slower economic environment and continued credit risk considerations,” said John Paolo Rivera, a senior research fellow at state-run Philippine Institute for Development Studies. “MSMEs are also recovering from higher financing costs and softer demand, which may have tempered loan demand.”

Jonathan Ravelas, senior adviser at Reyes Tacandong & Co., pointed to structural constraints that continued to weigh on bank lending to MSMEs.

This is because banks are typically hesitant to lend to MSMEs due to factors like lack of acceptable collateral, unstable income or cash flows and lack of credit track record. This forced many MSMEs to borrow funds with high interest rates from informal sources like loan sharks.

“The story here is not a lack of liquidity but a lack of bankable borrowers,” Ravelas said. “Until constraints on credit information, collateral and financial records are addressed, MSME lending will continue to lag overall loan growth.”

Looking ahead, Rivera said MSME lending should gradually improve once inflation eases, financing conditions become more favorable and economic activity strengthens.

“Continued efforts to improve MSMEs’ access to finance through credit guarantee programs, digital lending, financial inclusion and capacity building will be important to support entrepreneurship, employment and inclusive growth,” he added. INQ